Tariffs: Expect Less, Pay More

A quick and (hopefully) simple look at how a tariff impacts all consumers (whether you support the current Administration or not).

You own a company in the US. Everyone wants one of your Galactic Fun Consoles.

You assemble them in your plant in Nashville. They consist of two parts.

For one part you are able to buy the materials from a business in North Carolina and it costs $30. The other part is only manufactured in Vietnam and costs $50. The average cost you pay for assembly and shipping is another $20 per console. So your cost per console is $100. You sell each console for $150. Your markup per console is $50.

Your profit margin on each console is 33%. Wall Street analysts expect you to continue to produce a profit margin of 33% (or better if you can improve efficiency by laying off workers and using robotics and AI -but that's another article for another time).

Now for various reasons the President announces tariffs on Vietnam of 50%.

You still pay the supplier in Vietnam $50. Now, as importer, you pay the US Treasury $25.

This means your cost per console has increased from $100 to $125. And Wall Street still expects a margin of at least 33%. (If you don't hit the margin target, your stock price will crumble and your investors might fire you).

So now you must charge a minimum of $187.50 per console. This is because you are passing your costs on to the consumer. And you might decide $190 is a nice round price which will also yield a slightly higher profit margin.

This is a simplified version of how tariffs work.

To go deeper as you cause inflationary pressure in the economy that has imposed the tariff you can cause the currency value to decrease. If you assume the currencies are equal prior to the tariff, and the US imposed tariff causes US currency to be devalued, instead of the part from Vietnam costing $50 USD, it now costs $55 USD. So additional costs beyond the tariff are passed along to your US consumers.

And it is passed along to ALL consumers, whether you are liberal, conservative, or "I don't care about politics".

Some of you are delighted to have a “strong President” who is finally going to make trade fair and “balance the US budget”.

The unfortunate reality is that he’s working to make tax cuts for corporations and his wealthiest donors permanent while you, the American consumer pays for it. This is why others have correctly called tariffs a tax on all of us.

This will make his wealthy benefactors delighted. I’m sure they will thank each and everyone of us with living wages and upward mobility.